Amazon Buys the Middle East's First Ecommerce Unicorn
Amazon’s journey of global online shopping domination seems to continue as the e-commerce behemoth may be closing one of its biggest acquisitions in years. The Seattle online retailer has agreed in principle to buy 100% of the region’s biggest e-commerce player, Dubai-based Souq.com, after walking away from the deal in January over pricing disagreements.
The terms of the deal were not disclosed, Reuters said, but Souq had been valued at $1 billion in its most recent funding round of $275 million last February. Investors from that round were Tiger Global Management, Naspers, Standard Chartered Private Equity and International Finance Corp. Since that funding, Souq.com, which says it gets 1.5 million visits a day, has been called the Middle East's first unicorn.
What’s in Amazon’s Shopping Cart?
Souq.com launched in 2005 as an Internet auction site and in 2011, shifted its business to become a retailer and marketplace for third-party vendors, serving a number of markets including consumer electronics, fashion, and household in the region, including UAE, Egypt, Saudi Arabia, Kuwait, Bahrain, Oman, and Qatar. Today, the company’s marketplace lets some 75,000 brands meet with consumers through the total number of products on offer currently at around two million across over 30 categories.
The power Souq has in the marketplace is obviously one of the biggest gains that Amazon is putting in its shopping cart with this deal but, there are also other paramount benefits coming with this deal. First, considering Amazon doesn’t have many elements of a retail operation in the Middle East, the company’s “Fulfilled by SOUQ” initiative, which is similar to Amazon’s innovative and popular Fulfillment by Amazon (FBA) program, will take care of operational hurdles by keeping in line with Amazon’s vision. Another aspect that Amazon is buying is local expertise, which will free Amazon from the burden of dealing with bureaucratic tasks in the region. Additionally, payments expertise and technology localized to the region will be other items in Amazon’s shopping cart as Souq’s online payments gateway Payfort is expected to be part of the deal.
Even though all of these benefits will help Amazon hit the ground running in the region, the primary reason behind the deal is tapping into the growth in this emerging market. The Middle East is on the verge of a massive digital disruption with significant untapped e-commerce potential, according to a 2016 Digital Middle East report by McKinsey & Company, with e-commerce penetration in the Middle East estimated at a mere 2 percent of retail sales. Another important point about the region is that the market is expected to significantly outpace the growth of the global luxury goods market in the next five years. Seen together with the far-reaching potential of e-commerce in the region, Amazon’s entry into the market can shake things up and will lift the game.
It’s also worth noting that Qatar is a country with the third highest per capita GDP worldwide, less than 20% of Internet users made purchases online in 2015. These figures present enormous opportunities for online retailers to grow as the local online buying potential is being largely unexploited. Especially when it comes to mobile commerce, the region establishes a high potential as the young population and mobile device penetration are really high in Kuwait, Saudi Arabia, and the United Arab Emirates.
Amazon, of course, is not the only one that tries to receive the lion’s share from the far-reaching potential of e-commerce in the region. There is another big venture called Noon.com, the e-commerce platform slated to rival Amazon, which is yet to launch with $1 billion of funding split between Saudi Arabia’s Public Investment Fund and Mohamed Alabbar, founder of Emaar Properties and Emaar Malls, which owns The Dubai Mall, plus, a group of investors from GCC (Gulf Cooperation Council) countries. The e-commerce site will sell 20 million products from the world’s largest warehouse of its kind.
Amazon Effect in Emerging Markets
“Amazon acquired the Chinese e-commerce company joyo.com to establish a beachhead in China in the early days of online shopping, and we believe can take lessons from that experience to better manage the growth opportunity in the Middle East,” Baird Equity Research analyst Colin Sebastian said in a note.
Mexico is another emerging market when it comes to e-commerce. In fact, a Forrester report cited that Mexico was due to see increased sales of 150 percent between 2013 and 2018, going from $2.2 billion to $5.5 billion. In recognition of the region’s increasing potential, Amazon didn’t waste time and in 2015, the e-commerce giant launched Amazon.com.mx which is a Spanish-language site featuring millions of items including consumer electronics, kitchen and home items, sports equipment, tools, baby items, health and much more. In conjunction with the launch of the site, Amazon also introduced its online selling service for Mexican businesses and sellers alongside its Fulfillment by Amazon service.
Amazon’s investments in India have been changing the landscape of the competition in the region which generated around $14-14.5 billion in e-commerce sales in 2016. The company has invested $2 billion in the Indian market and is planning to invest $3 billion more. Flipkart and Snapdeal lost ground to Amazon thus there have been rumors flying around saying that Flipkart and Alibaba-backed Paytm are in talks with Snapdeal, for a possible merger. “India is an important market for Amazon, not only because of the potential size of e-commerce in the country but also due to Amazon’s failure in China to become a meaningful player,” said Colin Sebastian. To me, Amazon’s serious capital commitment to the Indian market makes sense, too especially after being blown out of the water in the Chinese market by the champion, Alibaba Group.
Amazon operates in 11 countries and in the calendar year 2015, it scored net revenue of roughly $100 billion from online retail. In that period, its second-biggest market was Germany, which contributed $11.8 billion in revenue.
However, there are considerable barriers to entry in many countries, both cultural and infrastructural, I think Amazon’s strategy to expand its boundaries has been playing out nicely. When you think about the slow turnaround from India, this inorganic expansion to the Middle East market doesn’t sound like a bad idea because the difference between the Indian and Middle East market is their maturity. The slow GDP growth in India gives Amazon enough time to set its operations and business from the ground up and thrive organically whereas the share of B2C eCommerce on total retail sales of goods in the UAE alone is forecast to triple between 2014 and 2019. Therefore, right off the bat, the acquisition of Souq will set Amazon up to play a significant role in the region’s growing e-commerce market. Nevertheless, knowing the company has plans of entry into Singapore and Australia on its agenda for 2017, there will be many more acquisition news that we will discuss here at CMS-Connected in the upcoming months.